I ask Mr. Purcell to introduce chapter 2.8 because we are under a time constraint. Chapter 2.8 of the Report of the Comptroller and Auditor General reads:
Prosecution of Non-filers of Income Tax Returns
Background
The self assessment system requires every chargeable person to submit a return of income, profits or gains for each chargeable period by a specified filing date. As the timely filing of properly completed returns is the bedrock of self assessment, it is Revenue policy to bring criminal prosecutions under Section 1078 of the Taxes Consolidation Act, 1997 against those who ignore their filing responsibilities. Non-filer prosecutions are taken by way of summary proceedings in the name of the Director of Public Prosecutions in the District Courts. Prosecutions in Dublin are taken by the Revenue Solicitor, while outside Dublin the State Solicitors perform this work.
In 1998 Revenue decided to substantially increase the number of cases being referred for criminal prosecution for non-filing offences. This decision was based on the view that criminal prosecution would be:
The best method for obtaining outstanding returns
A deterrent against future non-submission.
The prosecution results for Income Tax non-filers for the past six years, which indicate the growth in convictions from 1998, are summarised in Table 2.7 below.
Table 2.7 Results of Prosecution of Income Tax Non-Filers 1997 to 2002
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
Warning Letters (Rev. Solicitor)
|
1,917
|
5,450
|
5,399
|
6,457
|
9,818
|
9,348
|
Cases referred for issue of summons
|
853
|
1,968
|
2,369
|
1,951
|
2,401
|
1,839
|
Number of taxpayers convicted
|
223
|
659
|
1,159
|
936
|
1,050
|
972
|
Total Fines
|
€0.2m
|
€0.9m
|
€1.5m
|
€0.9m
|
€1m
|
€1m
|
Objectives and Scope of the audit
The objective of the audit was to examine, in relation to Income Tax returns, the effectiveness of the prosecution approach
As a method to ensure submission of outstanding returns
As a deterrent against future non-submission.
The audit work included interviews, the issuing and review of questionnaires and the examination of internal reviews, correspondence and operational instructions. While Revenue has adopted various approaches to non-filers under other taxheads, these areas were not covered by this audit.
The role in the prosecution process of the central Compliance Policy Unit, four selected tax districts (Dublin, Cork, Letterkenny and Limerick) and the Revenue Solicitors Office was examined, together with recording and tracking databases in those offices. The reported results of the prosecution work in the four tax districts were reviewed and analysed.
An examination was also carried out on a sample of 99 Income Tax cases with 275 outstanding returns that were referred for prosecution by the four tax districts. The sample was selected on a generally random basis with the intention of achieving an even split between cases where convictions were actually obtained (in the event 56 fell into that category), and cases which did not reach that stage (43). Computer records, tax returns and correspondence relating to each case were examined and analysed.
The findings set out in the report reflect this approach to the audit, and fall into two sections that relate to:
The general review of the operation and administration of the prosecution process both centrally and in the districts
The more specific findings arising from the review of the sample of cases.
Operation of the Prosecution programme
A bulk issue of the standard income tax return form is made annually to all taxpayers required to make a return. Reminders are issued to those who fail to file a return by the due date i.e. 10 months following the end of the tax year. After a further 3 months, lists of cases with annual returns still outstanding are forwarded to tax districts for further investigation and, if necessary, prosecution.
Table 2.8 provides details of the number of Income Tax return forms issued for the tax years 1999/00 and 2000/01, and of the number of cases with a return outstanding referred on to tax districts.
Table 2.8 Tax Return Forms Issues and Non-Return Cases Referred to Tax Districts
|
1999/00 General Issue of Income Tax Return Forms
|
Non-Filer Cases referred to Tax Districts
|
2000/01 General Issue of Income Tax Return Forms
|
Non-Filer Cases referred to Tax Districts
|
All Areas
|
|
|
|
|
Dublin
|
72,434
|
16,846
|
75,942
|
22,412
|
Cork
|
40,129
|
7,845
|
40,719
|
8,410
|
Letterkenny
|
11,022
|
2,162
|
11,206
|
2,604
|
Limerick
|
27,290
|
6,033
|
29,494
|
6,510
|
Cases are categorised by the number of outstanding returns - most cases are persistent non-filers. The tax status of each case is checked on the Revenue databases prior to a visit and cases which should not be pursued are excluded. A programme of visits to assess the extent of tax at risk is organised for cases which have still failed to submit returns and are deemed possibly suitable for prosecution. A visit report is subsequently completed by the Field Officer with a final recommendation as to suitability for prosecution. Lists of cases deemed suitable for prosecution are forwarded by the tax districts to the Revenue Solicitor who then issues a 21 day warning letter to the non-filer. Cases that fail to respond to the warning letter are forwarded for summons. A separate summons is instituted for each outstanding return. Court times are arranged and summonses are served by the Gardaí. The Gardaí require at least 6 weeks to serve a summons. Each offence is liable to a fine of €1,900 (which can be mitigated by a maximum of 75%) and/or committal to prison for up to 12 months. The fine was increased to €3,000 by the 2003 Finance Act. A provision to allow Revenue to apply for a Court order compelling convicted defendants to submit the outstanding returns of income was included in the 1999 Finance Act. The powers available to Revenue in dealing with Court orders were further extended by the 2002 Finance Act which created an additional offence of non-compliance with the Court order, with the same fine or committal provisions as those for non-filing. Fines are collected by the Fines Office administered by the Department of Justice and paid over quarterly to the Revenue Commissioners. Revenue is obliged by law to publish details of convictions of non-filers.
While Table 2.8 indicated the annual flow of non-filing case referrals to the four tax districts under review, Table 2.9 details the disposal of that workload for 2001 and 2002, including by summons, conviction and Court order.
Table 2.9 Results of Prosecution Activity in Four Districts in 2001 and 2002
|
Dublin
|
|
Cork
|
|
Letterkenny
|
|
Limerick
|
|
|
2001
|
2002
|
2001
|
2002
|
2001
|
2002
|
2001
|
2002
|
Warning Letters
|
992
|
802
|
717
|
553
|
366
|
361
|
835
|
688
|
Referred for issue of summons
|
448
|
320
|
380
|
344
|
155
|
186
|
92
|
174
|
Convictions
|
373
|
371
|
256
|
301
|
112
|
9
|
88
|
64
|
Court Orders Returns Submitted
|
5
|
72
|
1
|
5
|
-
|
-
|
3
|
6
|
No returns needed
|
3,562
|
2,977
|
461
|
619
|
101
|
30
|
393
|
719
|
Unsettled Cases
|
9,102
|
15,964
|
3,820
|
5,355
|
941
|
2,055
|
2,241
|
3,257
|
Total Caseload
|
16,846
|
22,412
|
7,845
|
8,410
|
2,162
|
2,604
|
6,033
|
6,510
|
An analysis of cases handled by Dublin tax district in 2002 revealed that nearly one third of referred cases were 'settled', with 15% submitting returns while the remainder were deemed not due to make returns. Within that figure, the rate of returns submitted ranged from 24% of those with only 1 outstanding return to as little as 4% for persistent non-filers. 4% of cases were referred for prosecution with the emphasis on persistent non-filers; half of those proceeded to summons stage.
Findings from General Review
Deterioration in Compliance Behaviour
There were indications of a hardcore of non-compliant individuals and their numbers have increased substantially in recent years:
The number of cases referred to Dublin and Limerick tax districts increased by 60% in two years;
While a prosecution can only be taken once for an outstanding return some individuals have several convictions for non-filing (one case had seven convictions). Up to 10% of those convicted are repeat offenders. The Dublin prosecution database had 891 (13%) cases with previous convictions, with the bulk coming from persistent non-filers. In 2002 Letterkenny fast tracked the prosecution process for 152 repeat offenders whose current returns were outstanding.
Revenue Response
Compliance trends show that timely filing rates are holding and for the most recent year have improved from 74% to 75%. This figure is significant in the context of the 2002 change to the calendar-year basis of return, which meant that taxpayers and their agents had to deal with two income tax returns in one year. Specific compliance programmes viewed in isolation may not provide the best yardstick by which to measure compliance trends. There are other strategies besides prosecution to encourage timely compliance. Late filers are subject to 10% tax surcharge and interest on late payment of tax due. More importantly, to minimise tax at risk Revenue may raise assessments to tax in the absence of a return and pursue the liability to enforcement if necessary.
System and Resources Under Pressure
The holding back of distributions to districts, the emphasis on the multiple non-filer, the extended period before issue of summons and the serious backlog in Dublin district and in the Revenue Solicitors Office suggest a system under pressure to cope:
The 2002 download of cases of outstanding returns was not distributed to tax districts until August of that year. There was insufficient time in the tax districts to work these cases and outdoor visits were reduced from previous years. The bulk of cases heard by the courts in 2002 were taken from the download for 2001
The larger tax districts are unable to work the full download. Priority is given to categories of cases, mainly the persistent non-filers with returns outstanding for all 5 years. Due to the workload in Cork a distinction on the degree of suitability for prosecution is made following the outdoor visit with the result that some suitable cases are dropped from the programme. Cases which are excluded may be worked from future downloads
The recommended interval of 4 weeks to referral for summons from the date of warning letter was generally followed by Limerick, Cork and Letterkenny while Dublin allowed up to 6 months to elapse prior to referral for summons. 1,050 Dublin cases referred for summons are held in the Revenue Solicitors Office. In consequence of that backlog, a further 1,382 cases are held in the tax district ready for summons
Limerick tax district initiates their compliance programme with a telephone campaign followed by a warning letter from the district and then a visit for those who fail to submit returns. Other districts limit their telephone campaigns to agents.
Revenue Response
Technical developments taking place in Revenue's computerised taxpayer ledger system delayed the distribution of the 2002 download of non-filer cases to tax districts. By contrast the 2003 download was issued in March. Some tax districts did not work all 2002 cases because of the impending second return date in October. With regard to tackling non-filers at district level, it is not expected that all districts will do exactly the same thing. Districts are allowed to take account of local factors and to try different approaches if they feel this will achieve a better outcome.
Delays in Processing Cases
The maximum impact on the Non-Filer arises from a prompt and firm Revenue response to each outstanding return of income. That may not always be achieved:
The prosecution process is lengthened in some cases by delays in serving summonses, arranging court times, and numerous adjournments to facilitate requests for more time to submit returns. The length of time from the warning letter to getting a case to court varies from 3 months to over 2 years;
Up to 2001 the annual download extracted cases which had outstanding returns in any of the previous 5 years. In 2002 the application of a different programme identified and downloaded additional cases outstanding for more than 5 years and up to 10 years. In effect, prior to 2002, these latter hard cases were not included in the compliance and prosecution programme. Dublin received 400 such cases. Revenue have pointed out that these cases were previously subject to the debt management programme, which pursued both the tax due and the return.
Court Hearings
The course of the hearings in Court does not always run smoothly from the Revenue viewpoint. Instances include mitigation and a high level of adjournments.
Judges generally mitigate fines by or near the maximum limit of 75% when returns have been filed. The level of mitigation varies from court to court. In some courts fines were mitigated even though the returns were not filed. Other courts impose maximum fines in cases where the defendant fails to attend or submit outstanding returns. In other instances the benefit of mitigation was applied to repeat offenders. Revenue estimate that the average level of mitigation of fines is 62%.
Finalisation of cases is delayed by the high level of adjournments allowed by the Courts. There are many instances of cases with up to 5 or 6 adjournments. Revenue estimate that 37% of all cases brought to court were granted adjournments.
In cases of individuals with several offences before the Court, Revenue withdraw 50% of charges when returns are submitted in time for the court hearing and the defendant is in attendance. Only one charge is pursued in hardship cases. Judges have expressed reservations about convicting individuals who have filed returns.
Prosecution costs are awarded by some Courts to the State Solicitor. There is no evidence of subsequent transfer of costs to Revenue even though State Solicitors are remunerated by the State for this work. Revenue is not opposed to State Solicitors seeking costs provided such costs are transferred to Revenue on behalf of the DPP. However, Revenue have pointed out that neither the DPP nor Revenue have any contractual relationship presently with the State Solicitors whose contracts are with the Chief State Solicitor.
Fines and Court Orders
The tasks following conviction are fine collection and, in cases where the defendant has not already submitted returns, obtaining and enforcing an order of the Court for all outstanding returns of income. Performance is less than satisfactory in both areas:
The collection of fines imposed by the courts is not monitored by Revenue. The quarterly payover from the Fines Office does not provide a breakdown by case. A comparison of fines received by Revenue with fines imposed by the courts indicates that one third are not collected. There is little point in having fines imposed by the courts if there is no follow-up to ensure the fines are paid. Revenue has pointed out that the collection of fines is a matter for the Court Service.
Instructions to State Solicitors to apply for court orders in respect of outstanding returns did not issue from the Revenue Solicitor until 15 months after the provision became law in the 1999 Finance Act.
There is a lack of consistency in the approach adopted to the use of court orders. In Dublin and Limerick, court orders are sought in all cases where returns are not submitted on conviction. In Cork, court orders are sought in larger cases and/or cases with previous convictions where despite the conviction returns remain outstanding. In these cases following the application of the State Solicitor the decision on the imposition of fines is deferred to an adjourned court hearing as an encouragement to the defendant to influence the level of fines through the submission of the returns. In Letterkenny, court orders have not been sought but will be sought where it is deemed appropriate.
In all, 31 court orders were obtained nationally in 2000 while a further 40 were obtained in 2001. 19 non filers in Dublin and 14 in Cork have failed to comply with court orders.
As at June 2003 the offence of non-compliance with court orders, created in March 2002, has not been utilised by Revenue in any case to-date.
Revenue Response
The Revenue Solicitors Office is in the process of advising State Solicitors to actively pursue appropriate cases to prosecution for failure to obey the court order to file the outstanding return.
Audit of Non-Filer Cases
The selection of cases for criminal prosecution for failure to file returns follows the refusal of the taxpayer to respond to Revenue contacts, and a case review and visit to establish the likelihood of a reasonable level of tax at risk. It would be expected that such cases would receive strong consideration for selection for audit. The extent to which such cases are audited is unclear:
Dublin referred 20 cases to Dublin audit districts in 2002 as specifically suitable for audit. Dublin also forwards all late returns received from prosecution cases to audit with a recommendation that they be included in the next screening programme for audit selection. Cork forwarded 21cases and Limerick forwarded 14 cases in 2002 as suitable for audit. There was no feedback on any cases referred to audit.
Letterkenny do not forward returns obtained through the prosecution programme to audit.
Revenue Response
It does not follow that a case considered suitable for prosecution is necessarily suitable for audit. In many cases it may be more efficient to deal with risk to Revenue through the assessment and debt management programmes. However, all late filers are included as part of the screening programme used to select cases for audit. Cases are selected for audit purposes by tax districts, including Letterkenny, based on risk assessment criteria. The Revenue audit programme selects some 200 non-filers for audit each year. A computerised risk analysis system currently being developed is likely to bring more convergence to the prosecution and audit selection criteria.
Findings from Audit Sample
The results of the examination of a sample of 99 cases with 275 outstanding returns which were referred by the four selected districts for prosecution are analysed in this section. Features noted include the difficulty of obtaining returns in all cases even following conviction by the Court, the extent to which those who had been pursued by legal means for outstanding returns again failed to file a return for the current year, and the surprisingly low level of tax liability which was accepted without audit in respect of many of the cases which had gone to such lengths to avoid making a return of income.
Returns Obtained
Of the 99 cases, 79 submitted the outstanding returns, returns were not needed in 8 cases and 12 were still not resolved at 30 June 2003. In 5 of the unresolved cases returns have not been made despite a court order. Of 79 cases which ultimately submitted outstanding returns due to the prosecution programme, 33 have again not submitted returns for the most recent year - 2001.
Assessment and Collection of Tax Due
An analysis of the liabilities set out in 194 returns received from the 79 recalcitrant filers is shown in Table 2.10 and indicates that 50% of returns had a declared tax liability of less than €500 for the year under review. That the individuals appeared to require Revenue to utilise the full extent of its compliance procedures to establish that fact must raise questions as to the completeness of such returns. Revenue initiated an audit of the returns of two of the recalcitrant filer cases. Notwithstanding the extent of the delay in making a return and payment, computer files did not record interest charges in any cases. The self assessed amounts due totalled €371,615 but €63,134 remains unpaid by 21 individuals. The Field Officer report on outdoor visits generally did not record an assessment of the materiality of tax liabilities.
Table 2.10 Tax Liabilities Declared on Non-Filer Returns of Income Obtained under the Prosecution Programme
Total Tax Liability Declared
|
No. of Returns
|
% of Returns
|
Nil
|
55
|
28
|
€1-€500
|
43
|
22
|
€501- €2000
|
49
|
25
|
€2,001-€5000
|
25
|
13
|
€5,001-€10,000
|
15
|
8
|
Over €10,000
|
7
|
4
|
Total
|
194
|
100
|
The business status of the self-employed individuals whose returns are included in Table 2.10 covered a wide range of occupations including company directors, accountants, small manufacturers, publicans, builders, farmers, tradesmen, taxi drivers and hairdressers.
Revenue Response
Officers are instructed to make every effort to determine and record customers circumstances as well as their general disposition towards compliance and capacity to pay. A reminder drawing compliance officers attention to these instructions is being prepared. Comprehensive audits are ongoing in 2 of the sampled cases. Interest was charged on four late filers and collected from one to date. There have also been two VAT and one Relevant Contracts Tax audit relating to taxpayers in the sample.
Pre-Prosecution Activity
Analysis of the sample indicated the time intervals which elapse at the different stages of the process, and the extent to which cases can be resolved before a Court hearing
The time intervals which elapsed between outdoor visits and issue of the 21 day warning letter were
Dublin 3-12 months
Cork 4-6 months
The time intervals from issue of the warning letter to referral for summons were
Dublin 6-12 months
Cork 5-6 weeks
Letterkenny 2-3 months
Limerick 2-3 months
37 of the sampled cases were settled and not brought to court, of which 27 were settled without the necessity for referral for summons.
Prosecutions and Convictions
The sample confirmed the findings of the general review in relation to number of charges, repeat offenders, mitigation of fines, and multiple adjournments. It also raises a question as to whether all convictions in the sample were published.
Seven cases had previous convictions.
Fines were mitigated in all but 3 of the 56 convictions.
Of the 20 Dublin cases sampled, adjournments ranging from 1 to 6 occasions were noted in 10 cases.
A sample of 15 convicted Dublin cases were checked to the published quarterly list of defaulters. However, 8 of the cases could not be traced.
Conclusions
In its Annual Report for 2002 Revenue notes that as a result of a major project to introduce the Pay and File procedure, together with coordination with tax practitioners and An Post and a public information campaign, 80% of the 2001 returns issued had been returned within a few weeks of the due date together with €1.7bn. The focus of this report was on a later phase of compliance activity when cases which had failed to respond to the promptings of the central compliance programme are distributed to tax districts for local investigation and, in particular, the use of the prosecution option to ensure that a return is finally filed. Dealing on a case-by-case basis with a hard core of cases for which prosecution is considered the only suitable method of obtaining a return of income is in strong contrast with the annual high profile compliance campaign. Equally the final tax yield will be insignificant in comparison, and the overheads will be greater. However that phase is of equal importance as it ensures that the equity of the income tax system is preserved, and ultimately that the success of the mainstream tax system is maintained.
For these reasons, Revenue has increased the use of prosecution as a method of obtaining outstanding returns and the results of the revised approach can be seen from the annual statistics of convictions of non-filers which show an increase from just over 200 in 1997 to an average of over 1,000 per annum in the period 1999-2002. In addition there have been two amendments to the law to strengthen the power of Revenue to obtain the outstanding return as well as a fine in conviction cases. However the audit findings raise the question as to whether the policy as implemented is achieving its maximum impact.
The system would appear to be under pressure to meet the demands of full implementation of the non-filer prosecution policy as indicated by:
The late distribution of 2002 cases to districts, the focus on the persistent non-filer as opposed to hitting all initial instances, and the large backlogs in Dublin district and with the Revenue Solicitor
The length of time from warning letter stage to getting the case into court can be up to two years
Instructions to State Solicitors to apply for Court orders for returns of income did not issue until fifteen months after the provision became law under the 1999 Finance Act
Lack of consistency between districts in the approach adopted to the use of such Court orders
The offence of non-compliance with Court orders, created by the 2002 Finance Act has not been implemented to date.
A review may be necessary to establish how the various bottlenecks can be addressed in order to ensure that the prospective non-filer can have a strong expectation of being subject to an early firm response for each offence.
While the annual number of convictions and the imposition of over €1m in fines undoubtedly makes a significant contribution towards improved compliance levels, a closer examination gives rise to concern that the overall impact at case level is not as clear cut as might have been expected. There were inconclusive outcomes to many prosecution cases:
One third of the total fines imposed may not be collected
Returns remain outstanding in all of the five cases in the audit sample where Court orders had been obtained
The tax due remained unpaid in 25% of a sample of 79 cases in which returns had been obtained as a result of prosecution activity
Only seven cases from a sample of fifteen convicted cases were traced to the published quarterly list of defaulters.
Only full implementation of available penalties including the enforcement of court orders will change the behaviour of persistent non-filers. This is confirmed by data from the report indicating that at present up to 10% of those convicted are repeat offenders, and that of a sample of 79 cases settled through prosecution activity returns for the latest year are outstanding in 33 cases.
194 returns were submitted in 79 cases only after an extensive compliance effort by Revenue, and a commensurate degree of reluctance on the part of the taxpayer. It was noted however that 50% of these returns declared annual tax liabilities of less than €500. Most of the 194 returns were accepted by Revenue without audit.
In general, the prosecution of non-filers is established as an effective method for extracting returns and is a vital part of the compliance programme. The shortcomings identified, when addressed, should improve the effectiveness of an extensive and costly but very necessary process.
Revenue Response
Compliance levels for the most recent year, as they relate to timely filing, continue to improve with 75% of all returns received on the due date rising to 80% within a few weeks. Initiatives to assist taxpayers through electronic filing via Revenue Online Service (ROS), streamlining of processes, the introduction of the calendar year basis of return and Pay and File in 2002 will facilitate improvement in this area.
Revenue's programme of prosecution of non-filers is one of the measures used to address taxpayers who fail to meet their obligation to file a return. As can be seen from analysis provided in the report at Table 2.9, a percentage of cases with an outstanding return will, on examination, be reclassified as no return needed. This may arise where an individual has ceased to operate a business, moved into PAYE employment or the source of income giving rise to the return e.g. investments rental income, no longer exists.
The remaining hard core of cases who fail to lodge a return are pursued through criminal prosecution by Revenue. Notwithstanding the success of the prosecution of non-filers programme in securing outstanding returns, prosecution has done little to change behaviour amongst hard-core non-filers. The Revenue response throughout this report highlights how Revenue will target such cases using improved audit selection, greater knowledge of the taxpayer and their business through "whole case management" which will lead to the raising of accurate assessments which will be pursued through the debt management programmes to enforcement where necessary. Furthermore this whole case management approach will be fundamental to addressing the relationship between returns compliance and audit as raised by the report.
The shortcoming highlighted in the report relating to the timeliness of non-filers programmes and backlogs throughout 2002 have been addressed by Revenue in detail. 2002 was an a typical year given that:
The change from the tax year basis to the calendar year meant that uniquely two tax returns were due in 2002 at end January and end October respectively.
IT developments used to extract cases for the year 2002 led to a more comprehensive but later issue of cases to the tax districts i.e. August 2002 as opposed to May/June 2001 for the previous years returns.
As part of the Revenues current development of a New Compliance Strategy all operations will be reviewed with a view to ensuring that the most efficient and effective systems are in place so as to maximise the use of resources towards targeting the non-compliant. The main findings of an internal Revenue review of non-filers prosecutions, taken by way of summary conviction, were:
The threat of criminal prosecution, i.e. the Revenue Solicitors pre prosecution warning letter, has a success rate of some 70% in securing outstanding returns but there is little evidence that it changes future compliance behaviour for the better.
Criminal prosecution is -
a slow process,
reasonably, though not 100%, effective in securing outstanding tax returns, not effective in changing future returns compliance behaviour in all cases.
Amongst other recommendations the review concluded that the threat of prosecution is a useful tool in securing outstanding returns and should continue as one of the compliance options for dealing with non-filers.
Issues relating to the pursuit of outstanding fines, court adjournments and mitigation of penalties, even in the case of repeat offenders, remain a matter for the Courts. The Revenue Solicitors office is in the process of advising State Solicitors to actively pursue appropriate cases to prosecution for failure to obey the court order to file the outstanding return.